ACIT, Virudhunagar v. M/s. Karpaga Vinayagar Papers, Sivakasi

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH A CHENNAI (BEFORE SHRI HARI OM MARATHA JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE ACCOUNTANT MEMBER) .. I.T.A. NO. 1397/MDS/2010 ASSESSMENT YEAR : 2001-02 THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE VIRUDHUNAGAR. (APPELLANT) V. M/S KARPAGA VINAYAGAR PAPERS 49 NORTH CAR STREET SIVAKASI. PAN : AABFK0432H (RESPONDENT) APPELLANT BY : SHRI SHAJI P. JACOB RESPONDENT BY : SHRI G. BAS KAR O R D E R PER ABRAHAM P. GEORGE ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE REVENUE ITS GRIEVANCE IS THAT CIT(APPEALS) DELETED DISALLOWANCE OF ` 11 35 879/- MADE BY THE A.O. WHICH THE ASSESSEE CLAIMED TO HAVE BEEN MISAPPROPRI ATED. 2. SHORT FACTS APROPOS ARE THAT DURING THE COURSE O F ASSESSMENT OF THE ASSESSEE WHICH IS A DEALER IN PAPER AND BOARDS IT WAS NOTED BY THE A.O. THAT IT HAD CHARGED A SUM OF ` 11 35 879/- AS COMMISSION/ MISAPPROPRIATION IN ITS PROFIT AND LOSS ACCOUNT. E XPLANATION OF THE I.T.A. NO. 1397/MDS/10 2 ASSESSEE WAS THAT MANAGER OF THE ASSESSEE-FIRM SHRI VALLIAPPAN WHO WAS ALSO THE HUSBAND OF ONE OF THE PARTNERS HAD EM BEZZLED AMOUNT FROM FIRM AND HAD IN HIS OWN INDIVIDUAL ASSESSMENT OFFERED AN INCOME OF ` 50 LAKHS TO COVER SUCH AMOUNT. HOWEVER THE A.O. WAS OF THE OPINION THAT SUCH DISCLOSURE BY SHRI VALLIAP PAN WOULD NOT REDUCE THE LIABILITY OF THE FIRM. AS PER THE A.O. EVEN IF IT WAS CONSIDERED AS MISAPPROPRIATION DONE BY THE MANAGER SUCH MANAGER BEING A HUSBAND OF ONE OF THE PARTNERS SECTION 40A OF THE INCOME- TAX ACT 1961 (HEREINAFTER CALLED THE ACT) WAS AL SO APPLICABLE. THE CLAIM WAS THUS DISALLOWED BY THE A.O. 3. IN ITS APPEAL BEFORE THE CIT(APPEALS) ARGUMENT OF THE ASSESSEE WAS THAT THE AMOUNT TAKEN BY SHRI VALLIAPP AN WAS ACCEPTED AS INCOME BY HIM. FURTHER AS PER THE ASS ESSEE SECTION 40A(2)(B) WAS NOT APPLICABLE SINCE SHRI VALLIAPPAN WAS NOT A PARTNER OF THE FIRM. LD. CIT(APPEALS) WAS APPRECIATIVE OF THESE CONTENTIONS. ACCORDING TO HIM SHRI VALLIAPPAN WAS THE HUSBAND O F A PARTNER AND WAS ALSO ACTING AS MANAGER OF THE FIRM. HE HAD MIS APPROPRIATED THE MONEY WITHOUT THE KNOWLEDGE OF THE PARTNERS AND ASS ESSING OFFICER HAD FAILED TO SHOW HOW THE PAYMENT WAS COVERED UNDE R SECTION I.T.A. NO. 1397/MDS/10 3 40A(2) OF THE ACT. HE THEREFORE HELD THAT ADDITI ON/DISALLOWANCE WAS NOT JUSTIFIED. 4. NOW BEFORE US THE LEARNED D.R. SUBMITTED THAT T HE AMOUNT EMBEZZLED BY SHRI VALLIAPPAN ASSESSEE OUGHT HAVE T AKEN LEGAL ACTION AGAINST SHRI VALLIAPPAN WHICH WAS NEVER DONE . ACCORDING TO HIM EVEN IF SECTION 40A(2)(B) WAS HELD AS NOT APPL ICABLE THE PAYMENT COULD NEVER BE CONSIDERED AS EXPENSES INCUR RED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE-FIRM. 5. PER CONTRA LEARNED A.R. STRONGLY SUPPORTED THE ORDER OF THE CIT(APPEALS) AND REITERATED THE SUBMISSION MADE BEF ORE HIM. 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL C ONTENTIONS. IN THE FIRST PLACE WE CANNOT APPRECIATE THE ARGUME NT OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT SHRI VALLIAPPAN HAVIN G OFFERED THE AMOUNT TAKEN BY HIM FROM THE ASSESSEE-FIRM AS HIS I NDIVIDUAL INCOME SUCH AMOUNT HAS NECESSARILY TO BE CONSIDERED AS EXP ENSES OF THE ASSESSEE-FIRM. THIS IS FOR THE REASON THAT AN INCO ME IN ONE PERSONS HAND NEED NOT BE AN EXPENSE IN THE OTHER PERSONS H AND. NO DOUBT IT COULD HAVE BEEN AN INCOME IN THE HANDS OF SHRI V ALLIAPPAN BUT THIS WOULD NOT MEAN THAT ASSESSEE IN THE RETURN FOR THE RELEVANT I.T.A. NO. 1397/MDS/10 4 ASSESSMENT YEAR COULD HAVE CLAIMED THE AMOUNT AS A N EXPENSE INCURRED OR LOSS SUFFERED IN ITS BUSINESS. EVEN IF WE CONSIDER IT AS A COMMISSION PAYMENT SECTION 40A(2)(A) OF THE ACT EN ABLES AN A.O. TO DISALLOW EXPENDITURE WHICH IS EXCESSIVE OR UNREASON ABLE HAVING REGARD TO FAIR MARKET VALUE OF THE GOODS SERVICE OR FACILITIES FOR WHICH PAYMENT IS MADE. THERE IS NO DOUBT HERE THAT SHRI VALLIAPPAN IS HUSBAND OF ONE OF THE PARTNERS AND THEREFORE HE WOU LD FALL WITHIN THE AMBIT OF SECTION 40A(2)(A) READ ALONG WITH 40A(2)(B )(V) AND SECTION 2(41) OF THE ACT. ASSESSEE COULD NOT SHOW ANYTHING REGARDING THE NATURE OF SERVICE RENDERED BY SHRI VALLIAPPAN FOR M AKING ANY SUCH COMMISSION PAYMENT TO HIM. IN ANY CASE IT WAS AN ADMITTED POSITION THAT THE MONEY WAS DRAWN WITHOUT THE KNOWLEDGE OF T HE PARTNERS BY SHRI VALLIAPPAN AND THEREFORE IT COULD NEVER BE CO NSIDERED AS EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS OF THE FIRM OR AS A LEGITIMATE COMMISSION PAYMENT. IF WE CONSIDER IT A S AN EMBEZZLEMENT ASSESSEE OUGHT TO HAVE TAKEN SOME LEG AL STEPS AGAINST SHRI VALLIAPPAN ESPECIALLY WHEN SHRI VALLI APPAN HAD ADMITTED THE AMOUNTS IN HIS RETURN OF INCOME AS AM OUNT TAKEN FROM THE ASSESSEE-FIRM. THUS ASSESSEE HAS NOT BEEN ABLE TO PROVE THE BUSINESS PURPOSE OF THE OUTGO. THE ASSESSEE IS ALS O NOT ABLE TO I.T.A. NO. 1397/MDS/10 5 PROVE THAT IT HAD SUFFERED A LOSS DUE TO EMBEZZLEME NT SINCE NO STEPS WERE TAKEN BY IT TO RECOVER THE AMOUNT NOR ANY LEGA L REMEDY PURSUED. WE ARE OF THE OPINION THAT THE CLAIM COULD NOT HAVE BEEN ALLOWED AS AN EXPENDITURE OR LOSS INCURRED IN THE BUSINESS OF THE ASSESSEE. IT ALSO COULD NOT HAVE BEEN ALLOWED IN VIEW OF SECTION 40A(2)(A) OF THE ACT. THIS BEING SO LD. CIT(APPEALS) FELL IN ERROR IN DELETING THE DISALLOWANCE MADE BY THE A.O. ORDER OF LD. CIT(APP EALS) IS SET ASIDE AND THE DISALLOWANCE MADE BY THE A.O. IS REINSTATED . 7. IN THE RESULT THE APPEAL FILED BY THE REVENUE S TANDS ALLOWED. THE ORDER WAS PRONOUNCED IN THE COURT ON 25 TH FEBRUARY 2011. SD/- SD/- (HARI OM MARATHA) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI DATED THE 25 TH FEBRUARY 2011. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-II MADURAI (4) CIT-II MADURAI (5) D.R. (6) GUARD FILE